AUDUSD: Australian Dollar US Dollar Exchange Rate Forecast

The AUDUSD is a bit too frothy for my taste at these levels (although exceptionally bullish over the next year +), especially given the record number of speculative long positions as reported by the CFTC in its COT report. A pullback then is viewed as likely in the short term (2-4 weeks) with support at 10200/55. The question regarding the AUDUSD is whether or not the next setback will stay above the March low of 9703. The structure of the next decline should clarify.

Australian Dollar / US Dollar Valuation Forecast

AUDUSD Valuation Forecast: Bearish

Another month gone and another post-float high set for the Australian Dollar, with the currency still undeniably the most overvalued against its US namesake. Indeed, prices are trading at a hefty 33 percent premium to PPP-implied fair value. A snap-back looks increasingly imminent as the Federal Reserve finally begins to show signs of a hawkish shift while the RBA has solidified itself at neutral for the remainder of the year. Indeed, priced-in rate hike expectations suggest the RBA is the only central bank other than the Bank of Japan that is forecast to not to hike interest rates through the first quarter of 2012. The narrowing of yield spreads that this implies points the way lower, making for an attractive selling opportunity in the works.

What is Purchasing Power Parity?

One of the oldest and most basic fundamental approaches to determining the “fair” exchange rate of one currency to another relies on the concept of Purchasing Power Parity. This approach says that an identical product should cost the same from one country to another, with the only difference in the price tag accounted for by the exchange rate. For example, if a pencil costs €1 in Europe and $1.20 in the US, the “fair” EURUSD exchange rate should be 1.20. For our purposes, we will use the PPP values provided annually by Bloomberg. We compare these values to current market rates to determine how much each currency is under- or over-valued against the US Dollar.

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